Morning Reads





Price caps

Over at the G7 summit in the Bavarian Alps, Western leaders are attempting to find new ways to curb soaring energy costs, especially given the fears of an oncoming recession. The latest idea being pitched is caps on the price of Russian oil and gas, though obstacles remain, and the concept would need to garner widespread adoption to be effective. The Kremlin has already been making some serious dough from surging prices of its commodity exports, which have helped the government weather a continuous slew of hefty sanctions.

How caps would work: Details are still being discussed, but the plan aims to cap prices at a level close to the cost of Russian production - thereby denting Moscow's finances but still ensuring critical energy flows. To accomplish this, Europe would restrict the availability of transport and insurance services to shippers which only agree to observe the price ceiling (~95% of the world's oil tanker fleet is covered by the International Group of P&I Clubs in London and companies based in continental Europe). Another proposal would apply similar caps on Russian gas prices, or limit the usage of U.S. financial services that could also benefit the scheme.

Complicating the matter is the fact that EU just agreed to a phased-in ban on seaborne Russian oil shipments, while temporarily allowing crude deliveries via pipeline. Any new agreement would require the bloc to reopen the legal text of its latest sanctions package, which had to overcome significant hurdles and took weeks to approve. Big buyers of Russian crude, like China and India, could also settle for a lower standard of Russian insurance on their oil shipments, while Vladimir Putin may sharply cut supplies if he felt Russia was being threatened (he already turned off some natural gas taps heading to the EU).

On the move: The price of a barrel of oil fell to nearly $100 on June 22, but has climbed around 10% over the past week and is up 50% YTD. Early Tuesday, WTI crude futures (CL1:COM) reached as high as $111.63/bbl, with the market still on edge over supply disruptions that could exacerbate the delicate energy landscape. Not helping the situation are signals that Libya could face limited supply amid a worsening political crisis, the possibility that Ecuador could halt some output due to anti-government unrest, and confirmation from the UAE and the Saudis that they are near maximum production capacity. (17 comments)

Just Do It.

A beat on the top and bottom lines didn't help Nike (NKE) in Monday’s extended session, with the stock gaining modestly before dropping nearly 3% AH. Quarterly revenue fell 1% to $12.2B and inventories soared by 23% to $8.4B, showing that the company is still attempting to balance demand with a troublesome supply chain. Wall Street was also concerned about overall sales in China, as well as exposure to inflation and foreign exchange impacts.

Quote: "As we move forward, we will stay focused on what we can control," CFO Matthew Friend announced on a conference call, adding a dose of optimism as the company enters fiscal '23. "This includes leveraging our scale and financial strength, optimizing supply and demand and most importantly, creating value for our consumer from the products we design to the stories we tell, to the experiences that we deliver."

The sneaker giant also highlighted three of its foundational elements for long-term value creation, including its global portfolio, consumer-led digital transformation and expanding its direct-to-consumer operational capabilities. Elsewhere, the board approved a new four-year share repurchase program that will allow management to buy back $18B in common stock. The new program replaces a prior $15B share repurchase program that was due for termination in fiscal 2023.

Outlook: "We continue to closely monitor consumer behavior and we're not seeing any signs of pullback at this point in time," Friend continued. "In the first quarter, we expect real dollar revenue growth to be flat to slightly up versus the prior year due to COVID disruption in Greater China and more than 500 basis points impact from foreign exchange translation. We expect gross margins to be in the range of flat to declining by 50 basis points versus the prior year with a wider-than-usual range reflecting our consideration of a number of scenarios." (50 comments)

Ethics exam cheating

The SEC just slapped a record $100M fine on accounting giant Ernst & Young, marking the largest penalty the agency has ever imposed on an audit firm. Reason? Dozens of EY audit professionals sent or received answer keys to CPA ethics exams, while hundreds cheated on continuing professional courses to renew their licenses. KPMG, another Big Four accounting firm, was fined $50M for similar transgressions in 2019, but the EY penalty was doubled because it had withheld information about the misconduct.

Backdrop: EY received a tip from an internal whistleblower in June 2019 that employees were cheating on exams, but failed to inform the SEC, and only disclosed past instances of cheating. In the meantime, EY began its own investigation, trying to learn more about the claim and come up with a plan to address potential issues. However, EY's lawyers and executives knew within months that "the cheating involved more than a small number of individuals in a single office," while the dishonest activity - which began in 2017 - continued through 2021.

"It's simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things," SEC Enforcement Director Gurbir Grewal declared. "And it's equally shocking that Ernst & Young hindered our investigation of this misconduct." As part of the settlement, EY will additionally be required to pay for two separate compliance reviews by outside firms.

Go deeper: The situation may complicate an effort by top partners at EY to split the company into separate auditing and advising divisions. A potential IPO is seen as one of the options for its advisory unit, and could alleviate regulatory pressure and conflicts of interest. While revenues at the audit division totaled $14B in 2021, EY's advisory business, which offers tax consulting and advice on deals, generated revenues of nearly $26B.


Shares of Robinhood (HOOD) soared 14% to over $9 on Monday following reports that Sam Bankman-Fried's FTX was eyeing the trading app. The crypto exchange appears to be on a bit of an acquisition spree of late amid recent reports that it could take a stake in crypto lender BlockFi. In addition, Alameda Research, SBF's quant trading shop, has reportedly taken a large stake in crypto broker Voyager Digital (OTCQX:VYGVF).

Quote: "We are excited about Robinhood’s business prospects and potential ways we could partner with them," Sam Bankman-Fried, also known by his initials SBF, said in an emailed statement to Seeking Alpha. "That being said, there are no active M&A conversations with Robinhood." Yesterday's outsized move still marked a big session for Robinhood, which has been trading well below its $38 IPO price for most of its first year on public markets.

Adding to the speculation was a 13D filing filed by SBF last month, which disclosed that a business affiliated with FTX took a 7.6% stake in Robinhood. Around the same time, Robinhood CEO Vlad Tenev declined to say directly if the FTX founder and CEO reached out to him about taking a stake. CNBC also reported that FTX was looking for acquisitions of brokerage startups as the crypto exchange expands into stock trading.

Analyst commentary: "I don't see this as a fire sale here," JMP Securities analyst Devin Ryan declared, outlining that FTX would really have to get "Robinhood management on board here at a much higher price." Separately, Goldman Sachs raised the stock to Neutral from Sell on Monday, while Citi analyst Jason Bazinet has previously said Robinhood may be worth about $15/share in a takeover. Consolidation may also be key to weather the recent "crypto winter," which has seen panic and an accompanying shakeout hit the industry since last November. (17 comments)

Today's Markets

In Asia, Japan +0.7%. Hong Kong +0.9%. China +0.9%. India flat.
In Europe, at midday, London +1.2%. Paris +1.2%. Frankfurt +0.8%.
Futures at 6:20, Dow +0.5%. S&P +0.4%. Nasdaq +0.4%. Crude +1.6% to $111.36. Gold +0.1% to $1826.30. Bitcoin +1.6% to $20,747.
Ten-year Treasury Yield +5 bps to 3.24%

Today's Economic Calendar

8:30 International Trade in Goods (Advance)
8:30 Retail Inventories (Advance)
8:30 Wholesale Inventories (Advance)
9:00 S&P Corelogic Case-Shiller Home Price Index
9:00 FHFA House Price Index
10:00 Consumer Confidence
10:00 Richmond Fed Mfg.
12:30 PM Fed's Daly Speech
1:00 PM Results of $40B, 7-Year Note Auction
1:00 PM Money Supply

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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